- Stop loss insurance is a type of insurance that sets limits for how much a business must spend on their employees’ healthcare expenses per year.
- There are two types of stop loss insurance policies—specific and aggregate coverage.
- Stop loss insurance offers several benefits for employers and employees with self-funded plans, protecting the business against high costs and ensuring employees can continue to access care throughout the year.
- Working with a TPA can give you the benefits of stop loss insurance while allowing you to avoid barriers like time-consuming administrative tasks.
Businesses have a lot to gain by offering their employees health insurance. However, the high costs of health coverage can weigh down business budgets and make it challenging for them to offer quality coverage—this is especially important for small businesses.
A self-funded plan can be a great option for businesses to maintain control over their healthcare expenses with fewer administrative costs, but it can also come with considerable risk.
Fortunately, stop loss insurance provides an excellent option, as the right plan can offer several potential benefits and protections. Businesses that embrace a stop loss insurance plan have the opportunity to save themselves from high costs while still providing their employees access to quality care.
How Does Stop Loss Insurance Work?
Stop loss insurance for self-funded health insurance plans protects businesses against unexpected high costs for their employees’ healthcare expenses. It also sets a limit on the amount of money that an employer is responsible for paying out-of-pocket for their employees’ medical expenses.
After the given limit is reached, the insurance company reimburses the business for any expenses past that limit. For example, if the limit is $20,000, the insurance company or a designated reinsurer will reimburse every medical expense a business makes over $20,001. This approach protects businesses from spending more than expected on employee healthcare.
The set limit is often determined through a negotiation between the employer and the insurance company. These negotiations are set based on the maximum amount the employer is willing to pay throughout the policy period.
As the two parties negotiate, they consider multiple factors:
- Coverage needs – Stop loss limits depend mainly on the extent of coverage an employer needs for their employees. This should consider input from employees about what coverage they need to meet their health goals.
- Risk assessment – A risk assessment highlights what the employer may be willing and able to pay compared to what may be necessary. This assessment may involve an actuarial analysis that uses historical claims data, health plan demographics, and other important data to guide potential expense limits.
- Premium calculations – The insurance company will determine how much your premium will be, based on the stop loss limits. The premium will also depend on the size of your employee pool, the risk profile of the employees, and other factors.
- The length of the policy period – The amount of time an insurance policy lasts will determine how high the limits should be. In most cases, the policy period is over the course of a full calendar year.
Once the business and the insurance company agree on a set stop loss limit, this limit is built into the contract. The contract terms will highlight the conditions and circumstances where the insurance company will reimburse the employer for claims above the specified limits.
Types of Stop Loss Policies
There are two common types of stop loss policies, each offering employers potential benefits. The better option depends on your business needs.
Specific Stop Loss Coverage
Specific stop loss coverage sets a coverage amount for each employee. After an individual’s claims exceed a specified amount, the insurance company or a designated reinsurer will reimburse the employer for the difference. This coverage limits the employer’s liability for each individual and provides protection against high costs from individual claims.
Specific stop loss coverage may be more helpful if your employee pool includes individuals who may have high anticipated medical expenses due to pre-existing health conditions or those with a growing family.
Aggregate Stop Loss Coverage
While specific stop loss coverage sets an amount for individual coverage, aggregate stop loss coverage applies to the employer’s liability across all coworkers as a collective group. The aggregate stop loss model protects the employer against high financial risk for covering the whole group’s claims.
In an aggregate plan, the insurance carrier, or a reinsurer, pays an employer if all cumulative claims paid out exceed a given number. This amount is often set yearly and based on the expected claims for all employees. Insurers usually set the amount around 125% of the calculated expected claims.
Aggregate stop loss coverage is usually a better option for medium- to larger-sized businesses that have a larger employee pool with more employees in need of significant healthcare expenses.
Benefits of a Self-Funded Healthcare Plan with Stop Loss Insurance
When businesses think of self-funded healthcare plans, they often think of they will have to risk paying significant amounts of money to manage their employees’ health needs. This concern can often prevent businesses from realizing the benefits of offering health insurance altogether. However, this isn’t necessarily the case.
Self-funded plans do mean that employers assume financial responsibility for their employees’ healthcare expenses. However, a plan with stop loss insurance allows businesses to enjoy the benefits of self-funded plans without the same risk.
Some of the benefits of a self-funded healthcare plan with stop loss insurance include:
- Consistent coverage – Without stop loss insurance, some employers could not cover employee healthcare services after reaching their budgeted yearly limit. Stop loss coverage allows employees to continue to seek care when necessary.
- Improved budget predictability – Companies that use stop loss insurance can better manage their yearly budget. With set spending limits, employers know that they aren’t going to pay above a certain amount for healthcare.
- Reduced risk – Stop loss insurance protects companies from unforeseen high insurance claims. This reduced risk is significant for small and medium-sized businesses with lower budgets for healthcare coverage.
- More financial security – By reducing their risk of high expenses and choosing affordable healthcare options, employers can offer quality healthcare plans while also leaving room in their budget.
- Improved employee outcomes – With stop loss insurance, employees don’t feel responsible for raising the price of their employer’s insurance. This makes them more likely to seek healthcare without fearing the risk of impacting the financial welfare of the company.
- More predictability – Stop loss coverage sets a limit for what businesses will have to spend for insurance claims, making their healthcare expenses more predictable. Businesses can then prepare their budgets around their stop loss limits.
Even with a set limit on spending, it doesn’t mean there are harsh limitations on what a plan will cover. Stop loss limits are designed to limit the risk of overspending on employee claims, not limit the ability of employees to receive care.
Although stop loss protects against high spending, employees can still access the care they need when necessary. As with any other health plan, the type of coverage that you and your employees receive depends on comparing health insurance plans and what areas of coverage you prefer to have included.
One important note for stop loss claims is that a policy does not pay for healthcare expenses directly, even if they exceed the set limit. The policy will only reimburse the employer for any expenses made.
Third-Party Administrators (TPAs) and Stop Loss Insurance
Third-party administrators (TPAs) are an important aspect of stop loss insurance plans. A third-party administrator is an organization that manages the administrative services related to health insurance benefits for employers, improving the efficiency with which employees can access care.
Building your terms for an insurance plan and negotiating with the insurer can be a complex and time-consuming process, especially if you are a small business owner with little extra time on your hands. Working with a TPA makes the process much easier, as they can establish predetermined terms that are built into the plan.
Redirect Health is an excellent example of a healthcare plan that comes bundled with an in-house TPA and stop loss insurance. As a TPA with licensing in all 50 states, Redirect Health makes navigating the insurance process easy, providing health plans with excellent templates for businesses.
Our plans also feature several other protections for businesses. Some of the benefits of working with a TPA like Redirect Health include:
- A seamless renewal process, with full transparency regarding costs
- A full support team for brokers and business owners to ensure a smooth and seamless transition
- Affordable premium rates with low deductibles
- 24/7/365 access to care for members
- Clear and transparent pricing
- No extreme year-over-year rate increases
- No yearly medical underwriting for renewals
Stop Loss Insurance That Addresses Your Business Needs
Self-funded plans with stop loss insurance are valuable for businesses, allowing them to control their care without the risks of unexpected healthcare costs. Choosing a plan with stop loss insurance offers better predictability and more financial security all of which allow your business to provide better healthcare coverage.
At Redirect Health, we offer affordable plans for businesses with stop loss insurance built-in to protect businesses against high costs. We work closely with small and medium-sized businesses to help them offer quality but affordable coverage to their employees. Between our industry expertise and our careful management of your healthcare journey, businesses know they can trust us to maximize their claims dollars.